Chapter 2

The payments ecosystem

This chapter outlines the payment system in Australia that enables customers to transact with merchants and businesses without physical money. It provides a brief overview of the traditional payment rails that underpin mobile payments and describes the new payment rails that are building on these or replacing aspects of the traditional ecosystem.

Overview of payments in Australia

The Reserve Bank of Australia (Reserve Bank or RBA) described the payments system as ‘arrangements which allow consumers, businesses and other organisations to transfer funds usually held in an account at a financial institution to one another’. These payments include both payment instruments used to make transactions (that is, a means for exchanging monetary value, such as cash, cards, cheques, and electronic funds transfers) as well as arrangements that move funds from accounts at one financial institution to another.1
Payment systems generally involve at least two financial institutions or payment providers, thereby requiring payments to be settled or ‘cleared’ between them. Clearing typically occurs at scheduled times each day and is therefore not resolved in real time.
Most payment instruments in Australia are cleared through members of the Australian Payments Network (AusPayNet), a limited liability company and a self-regulatory body for the payments industry that covers 98 per cent of
non-cash payment values in Australia.2
Payment clearing relevant to mobile payments and digital wallets is understood to be handled by eftpos, credit and debit card schemes (predominantly Visa and Mastercard), and the electronic bill payment system, BPAY.
Around 55 million transactions are made in Australia each day, accounting for up to $650 billion.3

Traditional payment rails

Australia’s payment platforms or networks enable money to move from a payer to a payee. These so-called ‘payment rails’ underpin most non-cash transactions between a customer and merchant at a point of sale (POS) as well as many online transactions.
As an example of how these rails operate, when a customer inserts a credit card into a merchant’s POS terminal, the terminal reads and digitally transmits the customer’s account information contained on the card to the merchant’s bank (the acquirer). The acquirer then requests authorisation for the transaction from the customer’s bank (the issuer). If the transaction is approved, the issuer provides authorisation back to the merchant via the acquirer. The issuer then transfers the funds to the acquirer, which in turn deposits the funds in the merchant’s account. This flow of information and funds constitutes the payment rails on which most non-cash transactions flow, including most mobile payments.
One of the main payment systems in Australia is the EFTPOS system, a series of interlinked networks operated principally by the major banks. Participating merchants rent from a financial institution a POS terminal that connects to the EFTPOS network. Customers with supported debit cards can make payments at these terminals, which may be verified with a chip and a personal identification number (PIN). Merchants that also accept credit card payments must enter into separate agreements with each credit card company.
Card transactions of this type typically attract a transaction or interchange fee (usually a percentage of the value of the transaction that is set by the schemes and regulated by the RBA) that is paid by the merchant and shared by the issuer, acquirer, and payment instrument provider. The merchant either absorbs these fees or passes them on to the customer in the form of a surcharge.
Surcharging is generally permitted in Australia, providing it reflects the cost of using the payment method and is not ‘excessive’ (that is, is not greater than the actual cost of acceptance).4
While merchants are permitted to impose a surcharge on customers to recoup interchange fees, independent payments consultancy, CMS Payments Intelligence (CMSPI), noted that only 4 per cent of transactions in Australia attracted a surcharge in 2019, likely due to strong competition among retailers.5
Buy-now-pay-later providers generally prohibit surcharging in their agreements with merchants, as discussed further in Chapter 6.

Figure 2.1:  Total merchant fees as a percentage of value of card transactions acquired

Source: Reserve Bank of Australia, (accessed 20 September 2021).
The average eftpos interchange fee imposed on merchants in 2019 was 0.3 per cent of the value of each transaction, while the average for a debit card transaction made via the Visa or Mastercard networks was 0.5 per cent. Visa and Mastercard credit card transactions were higher at 0.9 per cent on average, with American Express and Diners Club averaging between 1.4 and 1.8 per cent of the value of each transaction, respectively.6
Most debit cards in Australia have dual network support, enabling transactions through either the EFTPOS network or the relevant credit card scheme.7 Customers can select at the POS whether to make a payment through cheque (CHQ) or savings (SAV), thereby routing the transaction through the (generally cheaper) EFTPOS network, or credit (CR), thereby routing the transaction through the relevant card scheme.
Contactless or ‘tap-and-go’ transactions below a specified value are also increasingly supported by cards and POS terminals across Australia. Contactless transactions require cards with embedded radio-frequency identification (RFID) chips to be passed close to a merchant’s card reader. The necessary identifiers are transmitted from the chip, through the terminal, to the card issuer for approval, just as when a card is physically inserted into the terminal.
Contactless card transactions do not require a customer to actively select the network through which their payment information is routed. These transactions are routed through international credit card networks by default, but merchants with certain POS terminals can choose the payment route that incurs the lowest fees in a process known as ‘least-cost routing’ (LCR) or ‘merchant choice routing’ (see Chapter 6 for more on LCR).8
LCR is not currently supported on virtual cards used for POS payments via a mobile device. As eftpos CEO Mr Stephen Benton noted, ‘mobile payments technology [in Australia] has not been updated for least-cost routing’.9 These mobile payments are instead routed by default through the international card scheme, usually at a higher cost to the merchant.10
Industry analyst Mr Lance Blockley described LCR a generally an
‘all-or-nothing decision’, in which merchants must opt to route all eligible transactions through the network of their choice (be it eftpos or an international card scheme). Dynamic least-cost routing, however, allows each transaction to be routed through the network that incurs the lowest cost at the time—which may vary depending on the overall value of the transaction.11

New payment rails

The long-standing systems and processes that constitute the traditional payment rails have been disrupted over recent years, with new actors and platforms increasingly playing a central role within the sector. In addition to the customer, merchant, acquirer, issuer, and card scheme that participate in a traditional POS transaction, today’s mobile payments also involve the payment platform provider, a fraud mitigation engine, and a tokenisation service, among other participants.
Mr Blockley told the committee, ‘as payments have become more and more electronic in Australia and around the world, there are more and more people in that value chain’.12
Australian Finance Industry Association (AFIA) CEO, Ms Diane Tate, gave evidence that, ‘what we’re seeing is that the end-to-end value chain is being disrupted and disintermediated’.13
Mr Matt Comyn, Commonwealth Bank of Australia (CBA) CEO, similarly claimed, ‘digital wallets are an excellent example of how technology is challenging the traditional way we think of financial systems’.14
The Treasury review of the payments system summarised these developments as follows:
New technology has revolutionised the way we make payments, highlighting also the increasing role of new entrants that provide a variety of ‘add-on services’.15
Among the recent developments effecting payments in Australia is the New Payments Platform (NPP). The NPP is a real-time open access infrastructure for low-value payments that began operating in Australia in early 2018, underpinned by the RBA’s Fast Settlement Service (FSS, a system through which approved financial institutions settle payment obligations to each other). The NPP is a joint venture backed by 13 Australian banks and financial service providers.16
The NPP plans to support both QR code-based transactions and tap-and-go payments (see Chapter 3), as well as a range of peer-to-peer and
business-to-business capabilities.
NPP launched with ‘Osko’, a payments ‘overlay’ run by BPAY that allows customers of participating institutions to make near real-time (under one minute) payments to one another through their web banking portal or mobile banking application (app). Some participating financial institutions now route payments addressed to Bank State Branch (BSB) and account numbers through the NPP.17
eftpos and BPAY applied in December 2020 to the Australian Competition and Consumer Commission (ACCC) for authorisation to merge with NPP Australia under a new entity known as Australian Payments Plus or AP+.18 The Commission issued a determination on 9 September 2021 granting permission for the merger.19

  • 1
    Reserve Bank of Australia, ‘Payments System’, (accessed 28 June 2021).
  • 2
    AusPayNet, (accessed 4 June 2021).
  • 3
    Josh Frydenberg, 'A payment system fit for digital purposes', Australian Financial Review, 30 August 2021.
  • 4
    Government of Australia, Competition and Consumer Amendment (Payment Surcharges) Act 2016, sections 55 and 55B.
  • 5
    CMS Payment Intelligence, Submission 18, p. 2.
  • 6
    Kateryna Occhiutto, ‘The cost of card payments for merchants,’ in Bulletin, Reserve Bank of Australia, March 2020, p. 21.
  • 7
    eftpos and Beem It claim that more than 36 million cards in Australia have dual network support. See eftpos and Beem It, Submission 14, p. 3.
  • 8
    See Reserve Bank of Australia, ‘Least-cost Routing of Debit Card Transactions’, (accessed 22 June 2021).
  • 9
    Mr Stephen Benton, CEO, eftpos Payments Australia, Committee Hansard, 26 July 2021, p. 23.
  • 10
    Clancy Yeates, ‘The hidden cost of the tap-and-go boom’, The Sydney Morning Herald, 8 October 2017; CMS Payment Intelligence, Submission 18, p. 4; and Mr Steven Benton, CEO, eftpos Payments Australia, Committee Hansard, 26 July 2021, p. 26
  • 11
    Mr Lance Blockley, Managing Director, The Initiatives Group, Committee Hansard, 26 July 2021, p. 12.
  • 12
    Mr Lance Blockley, Managing Director, The Initiatives Group, Committee Hansard, 26 July 2021, p. 13.
  • 13
    Ms Diane Tate, CEO, Australian Financial Industry Association, Committee Hansard, 26 July 2021, p. 41.
  • 14
    Mr Matt Comyn, CEO, Commonwealth Bank of Australia, Committee Hansard, 27 July 2021, p. 1.
  • 15
    The Department of the Treasury, Payments system review: From system to ecosystem, June 2021,
    pp. 3-4.
  • 16
    These include the Australia and New Zealand Banking Group Limited, Australian Settlements Limited, Bendigo and Adelaide Bank Limited, Citigroup Pty Limited, Commonwealth Bank of Australia, Cuscal, HSBC Bank Australia Limited, Indue Ltd, ING Bank (Australia), Macquarie Group Limited, National Australia Bank Limited, and Reserve Bank of Australia. See NPPA, (accessed 17 June 2021).
  • 17
    Emilie Fitzgerald and Alexandra Rush, ‘Two Years of Fast Payments in Australia,’ in Bulletin, Reserve Bank of Australia, March 2020, p. 2.
  • 18
    James Eyers, ‘Eftpos, BPay, NPP agree to merge, to help banks take on card giants’, Australian Financial Review, 15 December 2020. See also Lance Sinclair Blockley, ‘Expert industry opinion In relation to the application to the Australian Competition and Consumer Commission for authorisation of the proposed amalgamation of BPay Group PTY limited and BPay LTD, eftpos Payments Australia Limited and NPP Australia Limited’, 18 March 2021, submission to Australian Competition and Consumer Commission regarding the proposed merger.
  • 19
    Australian Competition and Consumer Commission, ‘Proposed amalgamation of BPAY, eftpos and NPPA’, (accessed 20 September 2021).

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